How To Avoid Inflation Using Artificial Intelligence

This article about inflation was written by Gabriel Plat, a Financial Analyst at I Know First.

Summary

  • Over the last year, inflation rates started to increase in the U.S.;
  • When the inflation is high, assets such as Utilities Equities ETFs should be avoided;
  • At the same time, Real Estate Stocks and Cryptocurrencies become more attractive;
  • Even with the inflation threat, AI can help your investments.

What is the Inflation Situation Right Now?

(Figure 1: The Inflation Rate in the U.S.)

Ten months ago, the Federal Reserve (FED) was expecting average inflation of 1.8% for 2021. The inflation estimate topped 4.2% using the PCE metric by October and now is at 6.2%. In other words, things are getting more expensive.

According to the Bureau of Labor Statistics, consumer prices rose by 5.3% in the year ended in August, while food and energy prices increased 4%. Both percentages were smaller than the registered in July but still indicated a rise. The price index for meats, poultry, fish, and eggs increased 8%.

But what is the reason for this?

The answer may seem obvious: the pandemic. Governments needed a quick answer to the crisis generated by the coronavirus and it came by injecting money into the economy. The FED injected a total of 2 trillion dollars in March 2020 by expanding its repo operations while Joe Biden signed a $1.9 trillion Covid-19 economic relief this year. Even though it was a necessary medicine against the pandemic, inflation appeared as a side effect.

*Data Source: Federal Reserve Bank of St. Louis
(Figure 2: The Dynamics of M2 Money Stock)

More than that, the Delta variant is also a problem to the economic recovery. There is still a concern that Delta can postpone the U.S. and other countries to go 100% back to normal. As a consequence, emergency programs can be applied for longer than expected, resulting in higher inflation for a longer period.


What Investments Should I Avoid?

In a period with inflation on a rise, investments need to be done accordingly. Just like a card game, to be successful we need to understand the rules, analyze the scenario as a whole, and use these conditions in our favor.

Investments to avoid include the utility sector.

*Data Source: Reuters Finance
(Figure 3: Return from Utilities Equities ETFs in the Last Month)

As you can see in the chart above, some of the biggest Utilities Equities ETFs have been declining in the last month. This includes ETFs focused on the infrastructure such as IGF and PAVE, but also the domestic utilities sector (VPU) and XLU, an ETF that only invests in utility companies that are included in the S&P 500.

Plus, be careful when investing in long-term bonds at the moment. One of the solutions for governments to reduce the inflation rate is dealing with another rate: interest. In a scenario where the FED raises the federal funds rate, an investor that puts too much money in long-term investments before the decision will end up having a less overall return.


Where Should I Put My Money?

Although it does not look like, several assets become more attractive when there is an inflation threat surrounding the economy. Treasury Inflation-Protected Securities (TIPS), by definition, will protect your investment against any level of increase in inflation. But there are other options besides those types of assets.

As oil plays a key role in the economy, going from heating homes to fueling transportation, its price is often correlated to inflation. More than that, oil is one of the products that have price power during periods of inflation.

Source: Yahoo Finance
(Figure 4: Dynamic of the Oil Price)

There are other popular investment opportunities during inflation periods as well. Real estate has been a safe choice since there is a resale option or simply an income generated by rent. There is also an indirect investment in real estate in securities such as a real estate investment trust (REIT). Commodities such as gold and other precious metal are also popular anti-inflation investments and, more recently, cryptocurrencies.

Even though the high volatility seen in some cryptocurrencies, they started to be a safe bet against inflation, especially looking into other countries. Venezuela, a country that registered a whopping 10,000% inflation rate in 2019, saw its population migrate massively to not only the American Dollar but also Bitcoin and cryptocurrencies. Blockchain analysts from Chainalysis report that Venezuela leads Latin America in cryptocurrency trading.


AI Is Here To Help You!

The AI-powered algorithm developed by I Know First is perfect to help investors that are concerned about inflation rates. By using machine learning and over 15 years of stock database, the algorithm provides outlooks for different stocks in different time horizons, for both short and long positions.

For cryptocurrencies, for example, I Know First has a special forecast focused only on them. In a three months period, the algorithm predicted correctly 8 out of 10 price movements, with the package average return standing at 25.54%.

In our Real Estate Stocks forecast, we saw 10 out of 10 stock prices moved as predicted by our AI. The package delivered returns up to 135.85% in a one-year span, while the S&P 500 registered 31.86% in the same period.

(Figure 5: Real Estate Stocks Forecast Performance)

In other words, our packages help investors not only to avoid any losses but also to profit, regardless of the economic situation at the moment.

Conclusion

Like it or not, inflation appeared in 2021. Since the start of the pandemic in 2020, the United States and the rest of the world have had to deal immediately with it. Repo operations and an economic relief were made as an attempt to mitigate the impact of Covid-19 on the population. As a consequence, inflation rates started to increase in the last months.

With the inflation threat surrounding investments, we should invest correctly. At the same time, the utility sector should be avoided, other sectors such as real estate and even cryptocurrencies started to look more attractive.

For any type of investment, I Know First can help you. We offer several forecasts from our AI-powered algorithm to help you. With it, you can avoid inflation and boost your portfolio at the same time.